Dealing with Goliath? Proactiveness is your "Stone and Sling"

As a General Contractor grows within the construction industry, and it takes on ever larger projects, two things simultaneously grow: (1) the GC’s prospective profits on a successful project, and (2) the GC’s prospective losses when forced to cover extended general conditions, labor and material costs, amongst other items. Moreover, owners and construction managers on large projects generally have much more bargaining power than a growing GC, and often lean on the contractor to accept a slanted one-sided contract that exacerbates the GC’s risk.

This is most obvious in the world of public works, where City and/or State agencies solicit bids on Projects and require the winning bidder – who most likely tightened their margins to win the bid – to enter into a non-negotiable contracts drafted solely by the agency. In my experience, amongst the most heavy-handed agencies is the New York City Housing Authority (“NYCHA”), who for decades have employed what some term COFEDs (Contractor Forfeiture Enhancement Devices) in their standard contracts. The most notable COFEDs utilized by NYCHA in its contracts are the following:

1. A provision requiring the filing of a Notice of Claim within twenty (20) days of a claim being “ascertainable” in connection with ALL extra work performed on the project or requests for additional time;
2. A provision stating that NYCHA cannot be deemed to have waived any provisions of the contract; and
3. A provision stating that NYCHA is not subject to the legal principle of Estoppel, which precludes a party from asserting something contrary to what is implied by their previous actions or statements.

In other words, if a GC fails to file a Notice of Claim the moment its claim is “ascertainable” (i.e. quantifiable in some vague sense), whether or not the given change order was rejected, the GC loses its right to compensation – irrespective of whether NYCHA directed the GC to perform the work before a change order was formally issued, or even where there is a course of conduct between NYCHA and the GC where the agency did not require a Notice of Claim in connection with previous extra work or time extension requests on the same project. If a contractor is a single day late, they lose their claim.

In this context, NYCHA is a Goliath capable of bullying contractors. NYCHA can pick and choose which change orders will require accompanying Notices of Claim, and the contractor generally cannot use NYCHA’s own inconsistent actions/statements against the agency in court. This has been borne out in the courts for decades, where dozens (if not hundreds) of contractors have had their claims dismissed due to their “failure” to file a timely Notice of Claim – despite NYCHA routinely failing promptly reject a given change order, or NYCHA failing to enforce (i.e. waiving) the Notice of Claim requirement for certain change orders and then invoking it when faced with litigation. The courts routinely determine that NYCHA’s prior actions do not constitute waiver, and that NYCHA cannot be estopped on account of such actions, due to the aforementioned COFEDs.

A recent decision by the Appellate Division, First Department highlights the inherent risks NYCHA’s COFEDs pose to contractors. In AWL Industries, Inc. v. NYCHA, AWL accomplished something that few litigants have been capable of – that is, AWL survived NYCHA’s motion to dismiss its breach of contract claims due to purportedly unfulfilled Notice of Claim requirements (nearly all such cases are dismissed at the Lower Court). In its opposition to the motion, AWL wisely cited to the contract specifications’ language stating that a contractor may initiate “a claim” by submitting a potential change order, and highlighted the fact that it submitted its subject change order using NYCHA’s own prospective change order form.

In its decision rejecting NYCHA’s motion, the Lower Court notably referenced that AWL “provided…written notice of [AWL’s] intention to make a claim by filing a Potential Change Order form through [NYCHA’s] E-Builder System and that…the Potential Change Order did not become a claim until defendant approved or disapproved the Potential Change Order.” Despite the sound reasoning set forth by the Lower Court, the appellate court reversed the decision. In doing so, the appellate court relayed the same script it has used for decades, holding that AWL’s breach of contract claim “should have been dismissed…because [AWL] failed to comply with strict notice of claim provisions in its contract with defendant”.

This is not to say that you should avoid NYCHA projects all together, as they can be plentiful and quite fruitful under normal circumstances. But we all know that few if any projects go perfectly, and change orders for additional compensation and/or time are regular occurrences.

Notwithstanding the horrible track record of trying to fight NYCHA’s COFEDs in court, GCs are not left weaponless when dealing with this Goliath. Contractors can – and frankly should – lobby the state legislature for a statute providing that claims against NYCHA do not accrue (thereby triggering Notice of Claim requirements) until a claim/change order is formally rejected – as they did for the NYC School Construction Authority when they enacted Public Authorities Law §1744. This would make the date a Notice of Claim is due abundantly clear, eliminating a major pitfall in working on NYCHA projects. However, lobbying the assembly and governor is a long and expensive process, which has the unfortunate requirement of dealing with the political process.

So what is your best and most cost-effective course of action when dealing with NYCHA? The answer is to be proactive, and enlist the assistance of experienced construction counsel to perform “pre-litigation” services. That includes reviewing your NYCHA contract and charting a procedure for dealing with unanticipated issues – which can include a “job book” detailing each routine event on a project (a change order, a delay, an unforeseen condition, etc.) and providing the basic form document which should be submitted in such situation, complete with a caution as to when that document needs to be submitted. When brought into the fold early on, an experienced construction litigator can also review your proposed change orders and relevant circumstances, help you to determine when your claim will likely be deemed “ascertainable” by NYCHA and the courts, and assist in the preparation of a timely and sufficiently detailed Notice of Claim. In the event issues already arose on a given project, construction counsel can help stem the bleeding and minimize the losses to your bottom line. It may be hard to take on Goliath when a dispute arises but, like David, you can also prevail as the underdog.

If you would like more information regarding this topic please contact Andreas M. Koudellou at akoudellou@wbgllp.com or call (914) 607-6487